Fundamental risk arises from the inherent risk in the business –
from sales revenue falling or expenses rising unexpectedly, for
example. Price risk is the risk of prices deviating from
fundamental value. Prices are subject to fundamental risk, but can
move away from fundamental value, irrespective of outcomes in the
fundamentals. When an investor buys a stock, he takes on
fundamental risk – the stock price could drop because the firm’s
operations don’t meet expectations – but he also runs the (price)
risk of buying a stock that is overpriced or selling a stock that
is underpriced. Chapter 18 elaborates and Figure 18.5 (in Chapter
18) gives a display.